With the outlook of slow growth in the coming years, banks across Asia need to aim for significant structural changes to their cost base. This can be a challenge, however there are lessons from the experiences of other industries such as the European postal industry for example.
In the face of deregulation and contraction in their traditional mail business, European postal players managed to transform their business operations and in particular their cost structure. Lessons learnt from this experience can be applied to banks in Asia as they look to transform their own businesses and cost structures in the face of slow growth.
EU Postal Industry
The European postal industry was marked for deregulation since the start of the EU Postal Reform in 1997, with the implementation of full open market set to start in 2010.
Besides the deregulation, the business was also facing a distressing global trend: Mail volumes had fallen since 2001/2, mostly due to digital substitution and the financial crisis. In the last 3-4 years, volume drop had accelerated more rapidly.
In response to this, High Performing EU postal players have responded by:
Cost transformation in EU Postal Industry
Specific to the cost transformation initiatives, there are several approaches postal players have applied that Asian banks can learn from:
As a result, the EU Postal industry has managed to drive growth in revenue despite a declining traditional mail market. As an industry, they have turned losing businesses into more profitable ones and driven their cost to income ratio to low 90% from 100% or above.
Many of the players managed to restructure ownership of their retail distribution, by promoting the use of 3rd party postal outlets from roughly 1 in every 3 outlets in 1998, to roughly 1 in every 2 outlets in 2008. The industry also restructured their workforce cost profile, reducing the percentage of labour cost to total cost from above 60% to low 50%, resulting in significantly improved employee productivity as measured by employee spread.
Cost transformation in Banking
Reflecting on the philosophies from the EU Postal industry and aligning it with the reality faced by Asian banks, Accenture believes there are several critical themes that Asian banks can pursue:
Philosophy 1: Speed up banking supply chain to reduce total costs
The main catalyst to speeding up the banking supply chain is to move to real-time banking, and remove batch processing and manual intervention, which are often left-over from legacy system. Today, real-time banking is necessitated by customer demand for real‐time information and channel proliferation, but banks should also see this as an opportunity to remove operational inefficiency and reduce costs.
Another approach to achieve faster supply chain and reduce costs is to remove processes completely from operations by achieving “once and done” functionality at the front-office (branch, call centre, online) significantly reducing the need for manual completion in operations. Banks can then focus to automate and streamline processes that do flow into the back-office, through workflow and data pre-population.
Philosophy 2: Restructure distribution to balance customer service and costs
- Shift from transaction-oriented model to a sales/advice-oriented one
- Redefine the role(s) of physical distribution channels (branches)
Philosophy 3: Push fixed costs to a third party to variabilise costs
Philosophy 4: Labour is expensive, aim to achieve lowest costs per unit of labour
Philosophy 5: Share infrastructure and assets as a way to reduce costs
Philosophy 6: View diversification as way to refresh operating model and cost structure
Looking Forward: “Lean banking for leaner future business environment”
In Accenture's view, high performing banks will have to operate in real-time and be able to process works and information immediately, utilising new technologies to automate and to drive straight-through processing and minimise manual interventions. Real-time processing will help reduce costs in its own right, through reduced personnel, reduced work volumes, and reduced processing time. But more strategically, it will be a key enabler to harvest the full value of cost opportunities in the banks’ end-to-end supply chain from their front office and distribution network, to back-office processing, and enterprise functions.
Banks can leverage real-time capability to further drive for efficient and fully functional multi-channel distribution, drive further adoption of self-service channels and to test different retail models for their physical branches, including the use of franchised retail outlets.
Other significant cost efficiencies will come from consolidations of capabilities and infrastructure across different business units and brands within the same banking group. This opportunity is evident from the different efficiency level of similar business units within the same group. This can be complemented further with the transfer of non-value-add processes offshore to achieve lower unit cost of labour.
Lastly, banks should also look for opportunities to share their capabilities with external parties. While this is often seen as a distraction due to its different business nature, we have shown how certain players in postal and banking industries have been able to really use this not only to transform their cost structure but also to drive new revenue streams.
Andrew Pitcher, Asia Pacific Banking Managing Director, Accenture
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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Andrew Pitcher is the managing director of the Accenture Banking practice in Asia Pacific, as well as the lead for Accenture Payment Services for the region.